Overseas assets at China’s big five banks close to 10 trillion yuan, but they are still playing catch up

China’s “big five” banks are close to seeing their total overseas assets reach 10 trillion yuan for the first time, but a new study finds that their “performance gap” with foreign global peers is still wide.

As the mainland lenders see their international influence grow and continue to expand their presence along the Belt and Road countries, Renmin University and PwC have jointly warned that the incremental increase in the banks’ levels of internationalisation may be slowing.

“It’s become very important for the banks to be clear on where they stand in their development as they take advantage of the opportunities. They need to learn from international players’ experience and rationalise their footprints and fill out their strategies,” Renmin’s International Monetary Institute and PwC said in an upcoming joint report that will benchmark mainland banks’ level of internationalisation against global peers.

A Chinese Bank Internationalisation Index developed by PwC and Renmin uses various metrics to gauge the banks’ international performance. One finding was that while the big international banks on average derive about 60 per cent of their operating profits from outside their home market, China’s big five are currently bringing in an average of just 8 per cent internationally.

Against the world’s top five highest scoring banks, which achieved on average an index score of 73.6 per cent, the researchers said the big five have managed an average of only 8.9 per cent on the internationalisation score.

Even Bank of China, the most international of all the mainland banks, managed a score of only 21.57 per cent, versus Standard Chartered and HSBC’s 88.8 and 62.6 per cent respectively. The stark difference is evident even as both international lenders have been aggressively cutting back on their global footprints.

“China’s banks still face a long way to go in their internationalisation developments. They should prioritise understanding of the gaps in their strength, learn from international experience and minimise their tactical mistakes,” the report said.

While the gap in Chinese banks’ ability to ramp up lending was the smallest compared with global banks, it came with a note of warning that the aggressive expansion of loans may not make for a balanced profit model.

“The over reliance on interest income as a profit model most definitely requires change,” they said, noting that there is a lesson to be learned from the top US banks, including JPMorgan, Citi, Goldman Sachs, Bank of America Merrill Lynch and Wells Fargo, whose previously aggressive business practises have seen them hit with fines of some US$95 billion since 2008.

“Since 2000, because of uncontrolled expansion, weak risk controls and lack of legal knowledge, mainland banks have now attracted at least 10 known legal cases. When Chinese banks learn from international banks in operations experience, they should also make a point of taking international operational risk and controls seriously.”

The report’s authors said the right way ahead is to set up differentiated international strategies that are a good fit for their own individual models, aiming for stable long-term expansion while they take on new policies and technological opportunities.

Separately, as more of the mainland’s big five banks start to appear on the Financial Stability Board’s “global systemically important banks” watch list, the International Monetary Fund has started monitoring potential “spillover” risks to international markets as they internationalise, developing potential scenarios to monitor how such risks may be transmitted through the banking channels.

“Chinese banks’ overseas loans increased by more than US$600 billion since 2010 to reach near US$1 trillion at the end of 2015, and are likely to grow further with the government’s support for companies’ ‘go global’ policies, accelerating internationalisation of the renminbi, and new policy initiatives such as One Belt, One Road,” the IMF said in a paper released in August.

“Going forward, China’s financial links with the world are set to grow further with the internationalisation of the renminbi and gradual capital account liberalisation,” it said.